Monday, May 02, 2011

The Perils of Physicians Practicing as Corporate Employees: the Contract Trap

A seriously chilling cautionary tale corroborated some of my previously expressed fears about the perils of physicians practicing as corporate employees.  It unlikely venue was the April 25, 2011 issue of Medical Economics.  The article, not yet on the web, was "Selling to a Corporation Poses Challenges," by Todd R C Neely.

Here is how the case started:
A start-up company with a new medical treatment became a publicly traded corporation. The company's top managers were not physicians; they were finance and business experts familiar with the ways of Wall Street.

To meet the corporation's goals and Wall Street expectations, the company used stock sale proceeds to aggressively market itself to doctors and buy established physician practices around the country. It quickly captured market share, exponentially raised the number of patients by the practices it owned, and developed substantial revenue streams.

The physicians who sold their practices thought that selling would be a win-win situation for them and for the corporation. As marketed to them, the company would handle the business aspects of owning a medical practice - the ubiquitous paperwork, employee issues, and all the rest of the nonclinical task so distasteful to doctors. The physicians would spend all their work time practicing medicine using the latest technology. Benefiting from the company's promotion to the public, they would see an increase in their patient base. They would receive a base salary and, most significantly, a percentage of the profits of their practice.

But here is how things turned out:
Everything was great until the end of the first year. The physicians expected large payments from their practices' increased profits, but the large bonuses never came.

What went wrong? The physicians were so blinded by the marketing pitch that they apparently never read the fine print:
In negotiating the sale of the practices and the employee contracts, the doctors had not required the company to specify in writing what expenses the corporation would charge an individual practice and what accounting rules would be followed. So the corporation charged the practices for marketing, accounting, human resources, financing, and other services, wiping out the profits of each practice.

The contracts were apparently designed by the corporation to favor all its interests (which should not have been surprising), but was accepted as is by the physicians:
The contracts specified in precise terms the physicians' responsibilities, noncompete provisions, confidentiality, dispute resolution and the like. But although the contracts stated the corporation's initial responsibilities - mainly making payment on the negotiated purchase price - it phrased the company's other obligations in remarkably vague terms, or, astonishingly, did not specify them at all. The company was to make its 'best efforts' to accomplish certain goals, but the contract left the phrase 'best efforts' undefined. The phrase turned out to be quite malleable. The company's other responsibilities were to be determined at a later, unspecified time.

The company's best efforts always turned out to be whatever efforts it chose to make.

It was a trap,baited by marketing, into which the physicians neatly fell:
Many sought legal advice and were told they had no legal resource. The noncompete clauses - fair provisions under the contract terms to which the physicians thought they were agreeing but that were disastrous under the terms (or lack thereof) of the actual contract - were broad, tight, specific, and ironclad. Many of the physicians even were barred from practicing medicine within the geographic area in which they lived. And under the equally ironclad confidentiality clause, the doctors could not publicly discuss their situations or, for that matter, anything else of significance about the corporation; if they did, they would be subject to high fines and penalties.

What had appeared to the doctors as a mutually beneficial situation turned into a nightmare for them. They lost their practices and money and took years to recover. They had no legal recourse. They could not even warn others. The corporation could, and did, continue with impunity.

Note that it is now obvious why the article was so vague about the identity of the corporation and the physicians it ensnared, and why it took so long for even such a vague version of this story to surface. The confidentiality (and probably anti-disparagement) clauses made it hazardous for anyone who signed these contracts to be forthright witnesses. 

Obviously, the willingness of corporations to employ such clauses means that there may be many more cases like this out there, hidden behind the veil of contractual restrictions on free speech.

We previously discussed how physicians often seem willing to blithely sign contracts without fully understanding them, thereby sacrificing their economic well-being and core values.  Here is another striking case of this phenomenon.  We previously attributed this tendency to learned helplessness

The author of this article, however, suggested  that physicians were victims of carefully targeted marketing based on psychological manipulation.  It was meant to capitalize on three major factors: physicians' naive belief that everyone involved with medicine is interested in helping people by behaving rationally and logically; physicians' over-confidence in their ability to avoid failure (presumably including failure due to ignorance or misinterpretation of legal contracts); and physicians' feelings of entitlement. 

In addition, the physicians seemed (probably foolishly) unaware that corporate executives are not interested in physicians' core values:
Unlike physicians, the corporation and its top executives, non-doctors all, were involved in the practice of medicine solely to make money; the medical practices, and the very practice of medicine, were just commodities [to them].

This observation corresponds with numerous observations about how leaders of health care organizations may ignore, or be expressly hostile towards physicians' core values. Thus, while the article went on to give some straight-forward advice about negotiating combined practice buy-out and corporate employment agreements, it becomes obvious that the main lesson is: physicians should not practice medicine as corporate employees. They should not sell their practices to and become employees of for-profit corporations as a way to practice medicine.  Otherwise, rather than being practitioners, they will end up as medical assembly line workers for bosses who only care about the revenue they generate.

Physicians who have already inadvertently, foolishly, or under duress signed contracts that could threaten their professionalism and their patients' welfare need to do the right thing and challenge these contracts.  , or else there will soon be nothing left of the medical profession, and no one left to ethically care for patients. 

With each new anecdote, it becomes clearer that the corporate practice of medicine will end up exploiting physicians and patients alike. So there is also a main lesson for patients: you should not go to doctors who are corporate employees, or practices or clinics that are run by corporations. If you do, you will end up being used only as a means for the bosses to make money.

At a policy level, if we do not stop the corporate practice of medicine, we will all end up as increasingly unhealthy cogs in the corporate health care machine. 


Afraid said...

Are you saying that the big, quite profitable non-profit corporations are better?

I think not, since they behave the same and hide under a blanket of being charitable.

Plus, believe me, their contracts and lawyers are worse because they also do not have any SEC responsibility.

Anonymous said...

I am always struck by the similarities between the clergy and doctors, and the acceptance that all of the people involved have only everyone else’s best interest at heart

In one denomination the individual church hires the pastor with the assistance of the denomination. This is done at a low level and does not involve the corporate headquarters. The denomination’s manager is interested in growing numbers, not in service. The results are predictable.

Often we find what are essentially salespeople being hired to lead churches. (Remember the numbers game,) The results then follow a predictable corporate strategy.

An increase in staff, either paid or volunteer.

A team building exercise with a focus on money.

An increase in debt and access to funds by the salesperson/pastor.

An increase into people’s lives either to garner large donations or treading close to psychological counseling.

People who question this arrangement are dismissed due to a growth in numbers and increased giving.

When this comes crashing down the denomination says they did not hire the person. The person sues to continue their salary and wants’ a confidentiality statement. The results are much like what these doctors are experiencing.

The salesperson/pastor moves on to another job, and the new church has no knowledge of past issues. The congregation is left to sort out the mess with only a few people truly aware of the situation. Typically there is a great financial drain on that church. The denomination then blames the church for not doing its due diligence regarding the salesperson/pastor.

In medicine we see much of the same scenario with the points listed in the post. Doctors and congregation believe the people they deal with will not act in their own self interest to the detriment of the group they represent.

The reality is this corporate mentality has infected two of our bedrock institution, medicine and religion. When you loose these moral anchors, even the best efforts of individuals, will not be enough to create trust.

The focus on money by senior managers then drives lower level decisions and a general dissatisfaction with the institution. Patients and church members are then left supporting institutions that do not reflect their belief system, but are offered no alternative.

Steve Lucas

Anonymous said...

Didn't the physicians who sold their medical practices engage lawyers to go over the fine print of the contracts, before signing?

If they didn't, than as a patient I would not want to go to such doctors because they're not too bright.

Roy M. Poses MD said...

Afraid -
I suspect small not-for-profit institutions may sometimes be better, since their leadership may at times actually try to uphold their missions.

In theory, I believe non-profit leadership can be held accountable for not upholding, or at least deliberately undermining, their missions by state attorneys general and the IRS, would they have the gumption to do so.

Admittedly, public, for-profit corporations have greater requirements for reporting financial results, but private ones do not. Leaders of public for-profit corporations do not have an explicit obligation to uphold physicians' core values, although doing so could possibly help their financial results long term. We have seen that for-profit executives have huge incentives to make their short-term financial results look good, but seem to have no incentives to improve long-term results.

Anonymous of May 3, 2011, 8:46 -
At this point it might be fair to say any physician who signs a complex contract without getting good legal advice is foolish. But unfortunately most physicians never get any real training or exposure to such legal and business issues until it is too late.

Afraid said...

Small non-profit hospitals are a dying breed Roy, just like the ethics they had.

Can you agree with me that over a certain size, non-profits are as bad (or worse because they have cover) as for-profit systems?

Even when they do continue to survive, executives schooled at the big places often move in and replicate what they saw at the big places. And believe me, the big organizatins are putting the small fry out of business as a strategy.

So a healthcare mission is under lots of pressure to move to a money mission. Can we see much in the way of money-centric approaches moving back towards a healthcare focus? No, the trend is clear, we are headed for more money over medicine, not the other way. Colsolodation ... bigger AMCs, ACOs, Pharma, Device Makers, Insurance companies favor business over medicine.

The problem is size of the organization as it relates to market size. Big dominating operations have far too much power. Real power as well as understood power ... cross them and they will ruin you in the place you live.

This 800 pound gorilla problem is the cousin of too-big-to-fail. This is as true in healthcare as it is in banking.

It IS the problem and the laws, regulations and regulators have failed to police this for decades and leave it unaddressed now. Call it regulatory capture, call it crony capitalism, call it what you will, but it IS the problem.

A plank in a good populist platform would be "break up the huge companies" (for rebublican leaners - "enforce anti-competitive laws"). Large swaths of the citzenry supports this.

Oddly, the terminology and thrust of the political parties tends to make it seem like we disagree. Do we really wonder why?